Chapter 1: Business, Accounting, and You
Discussion Questions: Key Points
1. The economic events that affect a business are communicated through the accounting
function. Language helps us to make sense of the world around us. If we don’t know the
language, we will be limited in our ability to operate effectively in the business
environment.
2. Valid arguments can be made on both sides of this question. Without technical knowledge
an accountant will not be able to provide much value. Without ethics, however, an
accountant can be dangerous. Accounting exists because of a need for an objective account
of the economic events that affect an entity.
3. Financial statements seek to provide information about the events that have already
occurred. For example, the cost principle is used to carry assets on the books. It is up to the
user to make projections as to how past transactions are likely to affect future events.
4. Reasons why—reliability, objectivity. Disadvantages—relevance, decision-usefulness.
5. Financial statement uses discussed in the text: allow investors and creditors to make
investment decisions, enable suppliers and customers to determine the financial condition of
a business, and report to regulatory agencies.
6. It is a separate legal entity from its owners. Factors—liability of owners for business
activities, taxation, distribution of income.
7. A = L + SE. Assets—things of value a company has. Liabilities—amount a business owes to
third parties. Stockholder’s equity—the amount of assets that is owned by the stockholders.
8. The transactions would have the following effects:
a. A+, SE+
b. A+, L+
c. A+, SE+
d. A+, A-
9. Income Statement, Statement of Retained Earnings, Balance Sheet, Statement of Cash
Flows. The financial statements articulate (join together). The income statement needs to be
prepared in order to produce the net income amount that is reported on the statement of
retained earnings. The ending balance in retained earnings is needed in order to prepare the
balance sheet. The ending balance in cash on the balance sheet and other information is
needed for the statement of cash flows.
10. The financial statements are
a. Balance sheet
b. Statement of retained earnings
c. Statement of cash flows
d. Income statement
Copyright © 2019 Pearson Education, Inc. Kemp Waybright Financial Accounting 5e 1
, Short Exercises
(5-10 min.) S 1-1
1. d
2. a
3. c
4. b
(5-10 min.) S 1-2
Answer: d. Cost Principle
(10-15 min.) S 1-3
1. e
2. f
3. d
4. g
5. b
6. c
7. a
(5-10 min.) S 1-4
a. $82,000 ($106,000 − $24,000)
b. $91,000 ($63,000 + $28,000)
c. $49,000 ($94,000 − $45,000)
2 Solutions Manual Copyright © 2019 Pearson Education, Inc.
,(5-10 min.) S 1-5
Assets = Liabilities + Stockholders’ Equity
Accounts Notes Stockholders’
Cash + Equipment = payable + payable + equity
$13,000 + $35,000 = $9,000 + $5,000 + $34,000
Based on the accounting equation, Beach has $34,000 of equity in the business. Assets of $48,000
($13,000 + $35,000) − Liabilities of $14,000 ($9,000 + $5,000) = Stockholder’s equity of $34,000.
(5-10 min.) S 1-6
Assets = Liabilities + Stockholders’ Equity
Cash + Supplies = + Stockholders’ equity
$36,000 + $1,500 = $9,500 + $28,000
Based on the accounting equation, Boehms has $9,500 of liabilities. Assets of $37,500 ($36,000 +
$1,500) − Stockholders’ equity of $28,000 = Liabilities of $9,500
(5-10 min.) S 1-7
Assets = Liabilities + Stockholders’ Equity
Cash = Notes Payable + Common Stock
Investment + $15,000 = + $15,000
Borrowing + 18,000 = + $18,000 + ______
Bal. $33,000 = $18,000 + $15,000
Copyright © 2019 Pearson Education, Inc. Kemp Waybright Financial Accounting 5e 3
, (5-10 min.) S 1-8
Assets = Liabilities + Stockholders’ Equity
Accounts Accounts Common
Cash + receivable payable stock + Retained Earnings
Service – Salary - Dividends
revenue
expense
a. +$62,000 + 62,000
b. -$33,000 + $33,000
(5-10 min.) S 1-9
1. e
2. a
3. c
4. a
5. e
6. e
7. a
8. e
9. d
10. b
11. a
4 Solutions Manual Copyright © 2019 Pearson Education, Inc.
Discussion Questions: Key Points
1. The economic events that affect a business are communicated through the accounting
function. Language helps us to make sense of the world around us. If we don’t know the
language, we will be limited in our ability to operate effectively in the business
environment.
2. Valid arguments can be made on both sides of this question. Without technical knowledge
an accountant will not be able to provide much value. Without ethics, however, an
accountant can be dangerous. Accounting exists because of a need for an objective account
of the economic events that affect an entity.
3. Financial statements seek to provide information about the events that have already
occurred. For example, the cost principle is used to carry assets on the books. It is up to the
user to make projections as to how past transactions are likely to affect future events.
4. Reasons why—reliability, objectivity. Disadvantages—relevance, decision-usefulness.
5. Financial statement uses discussed in the text: allow investors and creditors to make
investment decisions, enable suppliers and customers to determine the financial condition of
a business, and report to regulatory agencies.
6. It is a separate legal entity from its owners. Factors—liability of owners for business
activities, taxation, distribution of income.
7. A = L + SE. Assets—things of value a company has. Liabilities—amount a business owes to
third parties. Stockholder’s equity—the amount of assets that is owned by the stockholders.
8. The transactions would have the following effects:
a. A+, SE+
b. A+, L+
c. A+, SE+
d. A+, A-
9. Income Statement, Statement of Retained Earnings, Balance Sheet, Statement of Cash
Flows. The financial statements articulate (join together). The income statement needs to be
prepared in order to produce the net income amount that is reported on the statement of
retained earnings. The ending balance in retained earnings is needed in order to prepare the
balance sheet. The ending balance in cash on the balance sheet and other information is
needed for the statement of cash flows.
10. The financial statements are
a. Balance sheet
b. Statement of retained earnings
c. Statement of cash flows
d. Income statement
Copyright © 2019 Pearson Education, Inc. Kemp Waybright Financial Accounting 5e 1
, Short Exercises
(5-10 min.) S 1-1
1. d
2. a
3. c
4. b
(5-10 min.) S 1-2
Answer: d. Cost Principle
(10-15 min.) S 1-3
1. e
2. f
3. d
4. g
5. b
6. c
7. a
(5-10 min.) S 1-4
a. $82,000 ($106,000 − $24,000)
b. $91,000 ($63,000 + $28,000)
c. $49,000 ($94,000 − $45,000)
2 Solutions Manual Copyright © 2019 Pearson Education, Inc.
,(5-10 min.) S 1-5
Assets = Liabilities + Stockholders’ Equity
Accounts Notes Stockholders’
Cash + Equipment = payable + payable + equity
$13,000 + $35,000 = $9,000 + $5,000 + $34,000
Based on the accounting equation, Beach has $34,000 of equity in the business. Assets of $48,000
($13,000 + $35,000) − Liabilities of $14,000 ($9,000 + $5,000) = Stockholder’s equity of $34,000.
(5-10 min.) S 1-6
Assets = Liabilities + Stockholders’ Equity
Cash + Supplies = + Stockholders’ equity
$36,000 + $1,500 = $9,500 + $28,000
Based on the accounting equation, Boehms has $9,500 of liabilities. Assets of $37,500 ($36,000 +
$1,500) − Stockholders’ equity of $28,000 = Liabilities of $9,500
(5-10 min.) S 1-7
Assets = Liabilities + Stockholders’ Equity
Cash = Notes Payable + Common Stock
Investment + $15,000 = + $15,000
Borrowing + 18,000 = + $18,000 + ______
Bal. $33,000 = $18,000 + $15,000
Copyright © 2019 Pearson Education, Inc. Kemp Waybright Financial Accounting 5e 3
, (5-10 min.) S 1-8
Assets = Liabilities + Stockholders’ Equity
Accounts Accounts Common
Cash + receivable payable stock + Retained Earnings
Service – Salary - Dividends
revenue
expense
a. +$62,000 + 62,000
b. -$33,000 + $33,000
(5-10 min.) S 1-9
1. e
2. a
3. c
4. a
5. e
6. e
7. a
8. e
9. d
10. b
11. a
4 Solutions Manual Copyright © 2019 Pearson Education, Inc.
